Record low interest rates are a thing of the past, economists say

Economist Shamubeel Eaqub said young people with big mortgages were in the biggest danger from a crunch.
LAWRENCE SMITH/FAIRFAX NZ

Economist Shamubeel Eaqub said young people with big mortgages were in the biggest danger from a crunch.

New Zealand homeowners are being told to fix their interest rates now if they want to avoid a looming increase.

The United States Federal Reserve has increased its interest rate by a quarter of a percentage point, a move that happened earlier than some commentators had expected.

International interest rates drive New Zealand's long-term rates, which have already started to move up. The median five-year rate available in the market is 5.87 per cent. One-year rates are still available below 5 per cent.

At the moment the Federal Reserve is expecting a total of three rate increases this year, although Fed chairwoman Janet Yellen said it was too soon to say what effect President Donald Trump's plans to cut taxes and increase spending might have on the direction of the US rate.

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Federal Reserve Chair Janet Yellen's decisions affect the long-term rates available in New Zealand.
GARY CAMERON/REUTERS

Federal Reserve Chair Janet Yellen's decisions affect the long-term rates available in New Zealand.

New Zealand economist Shamubeel Eaqub said fixed rates would rise further, even though the Reserve Bank would not move this country's official cash rate.

He expected an increase of 1.5 per cent to 2 per cent in fixed mortgage rates over the course of the next two years.

That would be a significant squeeze on homeowners with large amounts of debt, he said.

"If you've maxed out your credit at record low interest rates, small changes can have a big impact. It will be the more recently over-leveraged people who will be hurt the most."

There was still time to lock in low rates, he said, and commit to paying down a home loan.

"We saw the Federal Reserve move – the era of low interest rates is over."

ASB chief economist Nick Tuffley agreed rates were set to rise.

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"If the Federal Reserve continues on its plan we will see gradual steady increases coming through in the US over the next few years."

He said New Zealand rates out to five years could be affected by the US moves. "We've seen a fair jump in those rates come through already."

But he said shorter-term fixed rates would stay low for some time yet.

"We don't think the Reserve Bank will put the cash rate up until late next year. The market is ahead of itself already, pricing in a full 25 basis point increase by early next year."

Tuffley said it was a good time to fix, if borrowers were looking for certainty. "Rates are still likely to get higher over time. What's on offer at the moment – in time it's likely to be a lot higher."

Tuffley said if Trump created higher levels of inflation in the US than expected, the Federal Reserve might have to move faster.

 - Stuff

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